International Economic Conditions

Data released over the past few months suggested that global economic conditions
had, on balance, been a little more positive after weakening earlier in the
year.

Members noted that a range of data on the Chinese economy suggested that growth there
had stabilised. Fiscal policy easing, including support for infrastructure
spending, and improved conditions in the residential property market had supported
growth in industrial production and demand for bulk commodities. Exports had
continued to expand, particularly to the United States, following weakness
in the middle of the year.

Economic activity in the United States had continued to grow moderately. Members
observed that consumer sentiment had improved, consistent with employment growth
picking up to a moderate pace and better conditions in the housing market.
There was still considerable uncertainty as to how, and to what extent, the
‘fiscal cliff’ in early 2013 would be addressed by policymakers.
This uncertainty appeared to be weighing on business sentiment, with indicators
of investment, in particular, remaining subdued.

The Japanese economy had contracted in the September quarter, with notable weakness
in exports, while activity in the services sector had been little changed.
In the other higher-income economies in east Asia, growth remained weak. However,
for the lower-income economies in the region, growth remained close to long-run
averages.

Economic activity in the euro area had contracted further, with slow growth in Germany
and France, while the crisis economies continued to contract. Several governments
in the region, including those of France and Greece, had introduced additional
policies to address competitiveness and fiscal challenges, although these challenges
remained substantial.

Members noted that, overall, global commodity prices were little changed since the
previous Board meeting. Spot prices for coal had picked up slightly after falling
over most of the year. Base metals prices had risen, while rural prices were
little changed and iron ore prices had recorded a modest decline. The terms
of trade fell in the September quarter and were likely to have declined further
in the December quarter, to be around 15 per cent below their peak
in 2011.

Domestic Economic Conditions

With the September quarter national accounts data scheduled for release the day after
the Board meeting, information to hand at the meeting suggested that the pace
of output growth was around trend over the year to the September quarter, despite
some slowing in recent quarters, which in part reflected a decline in public
investment.

Members noted that growth in business investment looked reasonably strong in the
September quarter, though a range of data suggested that the outlook over the
next few quarters was softer than had earlier been indicated. The outlook for
mining investment over the remainder of the financial year had been revised
down in the ABS capital expenditure survey, largely confirming the outlook
based on liaison and other information that had been incorporated in the Bank's
most recent forecasts.

Members observed that cost-cutting in the iron ore and coal industries was feeding
through to related business services industries, resulting in some labour shedding.
Even so, exports of iron ore had remained at a high level over recent months
and coal exports from Queensland had been recovering following earlier industrial
disruptions.

Investment outside the mining sector increased in the September quarter, although
the capital expenditure survey suggested that there would be negligible growth,
or even a small fall, in 2012/13 as a whole. Members noted that survey measures
of business conditions had generally declined further and measures of capacity
utilisation were a bit below average, with the Bank's liaison suggesting
that some firms were investing only to cover the depreciation of existing capital.
Members noted that there was also concern in the non-residential construction
industry about the modest pipeline of work once the existing wave of committed
resource projects was completed. While growth in credit to unincorporated businesses
continued at a measured pace in recent months, growth of business credit overall
had slowed.

Forward-looking indicators of residential construction over recent months, including
building approvals, continued to point to a modest recovery in that sector
over the period ahead. This was likely to be supported by the pick-up in dwelling
prices, sales activity and rental yields over recent months. In addition, loan
approvals had moved a little higher since the middle of the year.

Several indicators suggested that consumption growth had slowed in the September
quarter, following the impetus to sales from heavy discounting and government
payments in the first half of the year. After declining in July, the value
of retail sales rose in August and September, but was unchanged in October.
Measures of consumer sentiment had picked up a little in recent months to be
a bit above average.

Employment in October continued to expand at a modest pace and the unemployment rate
remained at 5.4 per cent, slightly above its level earlier in the
year. Leading indicators and information from the Bank's liaison contacts
suggested that labour demand had softened, which pointed to only modest employment
growth in coming months.

As expected, the pace of wage growth eased in the September quarter. The slowing
had been most pronounced in the household services and retail sectors. Business
surveys and information from liaison suggested that businesses across of a
range of industries anticipated an easing in wage pressures in the period ahead.

Financial Markets

Members began their discussion on financial markets with the observation that most
markets had been relatively steady over the past month, despite uncertainty
about fiscal negotiations in the United States and the Greek bailout package.
The agreement on Greece's financial aid package reached late in November
provided only a small boost to markets, as most participants expected that
further concessions would be needed. Despite the fact that Spain was yet to
request financial assistance, yields on Spanish and other peripheral euro area
sovereign debt had remained close to the levels reached after the European
Central Bank's Outright Monetary Transactions program was announced in
September.

Members observed that the primary markets for corporate debt globally were strong,
with issuers benefiting from record low yields in many markets. Financial institutions
generally had been less active issuers of debt securities in recent months.
In Australia, issuance of bonds by corporates had reached a new high during
2012, as bond yields domestically also declined to record low levels. For the
Australian banks, the focus remained on raising deposits, although there were
signs that competition in some deposit markets was beginning to ease.

Share markets were broadly unchanged over November, with China being a notable exception,
where share prices continued to decline despite improved economic indicators.

Members noted that global currency markets had also been relatively quiet in November,
with exchange rate volatility low, although the Japanese yen had depreciated
by around 3 per cent against the US dollar. The Australian dollar
was little changed, remaining at a high level.

Members noted that domestic money markets had nearly fully priced in a cut in the
cash rate target at the present meeting.

Considerations for Monetary Policy

Globally, economic news over the past month had a slightly more positive tone than
was the case a few months earlier. Importantly, there were further signs that
the pace of growth had stabilised in China, contributing to a general stabilisation
in key commodity prices. The US economy had continued to grow at a moderate
pace, although the uncertainties posed by the ‘fiscal cliff’ remained
unresolved.

The available indicators suggested that the Australian economy had expanded at around
trend over the year to the September quarter. Mining investment had made a
further contribution to growth in the September quarter (although the outlook
had softened a little further). There were also tentative signs that dwelling
investment was turning up, but the outlook for non-mining investment overall
in the year ahead remained subdued.

For inflation to remain contained, ongoing productivity growth and a further sustained
moderation in wage growth would be needed. Recent data indicated that, to date,
there had been a small decline in the growth of wages, which was consistent
with the softening in the labour market seen over the past year. The forward-looking
labour market indicators had generally declined recently, suggesting that employment
growth would remain modest in the months ahead.

Following earlier decisions, lending rates were now clearly below their medium-term
averages, although they remained above the levels reached in 2009. Some of
the expected effects were starting to be observed and further effects could
be anticipated over time. At the Board's previous meeting, members had
considered that further easing may be appropriate in the period ahead, but
had decided to maintain the existing setting for the time being, in view of
the slightly higher-than-expected September quarter CPI and somewhat better
information about the world economy.

At this meeting, the information on labour costs and softening labour market conditions
suggested that the inflation outlook still afforded the Board some scope to
provide additional support to demand. Further confirmation that the peak in
resource sector investment was near, and that the short-term outlook for non-resource
investment remained subdued, indicated that there was a case for the Board
to provide that support. The Board considered whether to respond to this case
in the near term or wait for further information. On balance, members saw merit
in reducing the cash rate at this meeting.

The Decision

The Board decided to lower the cash rate by 25 basis points to 3.00 per cent,
effective 5 December.